In the battle to establish leadership in the IoT, ecosystems will ultimately be the competitive unit. There are three main levers for building a successful IoT ecosystem – an IoT platform, market expectation and network effects. Of these, market expectation and network effects will be particularly critical. The way in which operators use these two levers will be the key to differentiating their ecosystems successfully.

1. Ericsson Business Review, Issue 4, 2015
The Internet of Things (IoT) is one of today’s most
widely discussed technology topics. From trans-
formative applications like smart agriculture [1]
and telematics-based car insurance [2] to the in-
famous machine that starts brewing your morn-
ing coffee right before you wake up, everyone
seems to be talking about the IoT. Indeed, Gartner
has placed the IoT at the very top of the so-called
“peak of inflated expectations” [3].
There are many reasons why the IoT neverthe-
less remains at the level of expectation, rather
than a reality. Or indeed, why most of the appli-
cations that do exist are vertical solutions that
do not represent part of a dynamic, interconnect-
ed network.
One key cause is the lack of true IoT ecosys-
tems. This article explains how operators, who
are at the core of the IoT, can develop their IoT
ecosystems and tap into a market that – hype
aside – could be a major growth opportunity.
IOT AS AN ECOSYSTEM
Clearly, no company has the capabilities and re-
sources to do it all in the IoT. Instead, businesses
targeting this opportunity will always be part of
an ecosystem. This means that ecosystems are ul-
timately the competitive unit in the IoT – and that
the battle will be between these ecosystems, not
between individual companies.
Let us be clear here – an ecosystem is more than
a set of arms-length partnerships. It is a network
of independent contributors who interact close-
ly to create mutual value. This, in turn, creates in-
terdependency among partners in the ecosystem.
All partners share the same fate – individual part-
ners will be successful only if the ecosystem is suc-
cessful. This creates a completely new dynamic
for operators who, by and large, are not accus-
tomed to interdependency.
On the other hand, operators, as enablers of
machine-to-machine (M2M) communications,
are well positioned to be a keystone in these eco-
systems. However, a better understanding of how
ecosystems are created, together with a thorough
ecosystem strategy, is required.
CREATING AN IoT ECOSYSTEM
There are three main levers for building a successful
IoTecosystem.TheseareanIoTplatform,marketex-
pectation and network effects (as shown in Figure 1).
The IoT platform
This is the key building block of the ecosystem;
All dressed up and nowhere to go? Not necessarily. While the
Internet of Things spins through the hype cycle, operators are well
positioned to be long-term cornerstones of the ecosystem – it’s all
about managing elements and enablers.
▶
“In the Internet of
Things, the battle
will be between
ecosystems, not
between indivi-
dual companies”
Elements and enablers:
how to develop
an operator IoT
ecosystem

2. the enabler upon which ecosystem partners build
their services. The crucial aspect here is quality
–as perceived by the ecosystem. For example, high
availability and reliability, complete integration
capabilities and secure exchange of data will be
highly valued by potential partners.
Market expectation
This is related to how prospective users perceive
the creator of an IoT platform in terms of its po-
tential to become a leading IoT player in the long
term. Obviously, neither users nor ecosystem
partners want to commit to a platform that might
not exist in a couple of years’ time.
Network effects
Thethirdelementisconcernedwiththeself-perpet-
uating cycle of user and partner recruitment. More
partners and applications on the platform attract
moreusers;atthesametime,moreusersattractmore
partners and applications.
Supporting an ecosystem requires more than just
making an api available. Companies offering plat-
forms need to be able to create the right incentives
(financialandotherkinds),supportsystemsforpart-
ners to join, and define how they – and not compet-
ingplayers–willcreatemorevaluefortheirpartners.
LESSONS FROM OTHER ECOSYSTEMS
There are a number of cases from other indus-
tries that illustrate the importance – and interde-
pendency – of these three elements in building a
successful ecosystem.
One example is Microsoft and its Windows op-
erating system during the early days of personal
computing. The platform itself offered sufficient
quality for businesses to adopt it, and Microsoft
offered extensive support services for both users
and partners.
In addition, Microsoft signalled commitment
by investing strongly in development of both the
core product and complementary products, such
as the Microsoft Office suite, to kick-start the
Windows ecosystem.
At the same time, Microsoft focused on network
effects. Whereas ibm and Apple closely linked their
software and hardware, Microsoft made Windows
available to every pc oem. The incentive for oems
was to be able to compete with the dominant pc
maker, ibm, by offering a strong alternative. For
Microsoft, this created a large installed base that
attracted partners to develop products for the plat-
form and to provide broader services such as con-
sulting and systems integration.
In this case, network effects and market expec-
tation, even more than the quality of the platform,
were the key drivers behind Microsoft Windows’
rise and dominance of the ecosystem.
In other markets, however, the balance between
the three elements will be different. For example,
in the games console industry, network effects are
less important since most consumers tend to stick
to a handful of titles. Here, both platform quality
and market expectation tend to be more dominant.
THE OPERATOR CONTEXT
Just as in the examples above, the balance between
these three elements will be specific to the IoT
and, in particular, to operator-driven ecosystems.
In the case of the IoT, it is likely that market ex-
pectation and network effects will be more im-
portant than platform quality. This is not because
quality of the IoT platform is unimportant – in-
deed, a telco-grade IoT platform is critical. How-
ever, it is taken as a given. What will create dif-
ferentiation between competing ecosystems is
how operators use the other two levers.
Market expectation
When committing to a particular ecosystem, users
want to be assured of the long-term viability of the
selected provider. A utility company will favor an
operator IoT platform if it believes its smart-meter-
ingsolutionwillbesupportedinthelongterm.Sim-
ilarly,aconsumerconsideringasmart-homeservice
will favour the service provider it believes will be
part of a leading ecosystem, just like most smart-
phone users today favor the ios and Android plat-
forms over Windows Phone or BlackBerry.
Here,operatorshaveanumberofoptionstoshape
market expectation. First, they can signal commit-
ment by setting up IoT units and investing in IoT
platforms. They can launch vertical solutions to re-
inforcecommitmentandtokick-starttheirIoTeco-
systems. Setting up an initial set of partnerships in
support of the operator’s ecosystem is essential to
further shape market expectation.
Network effects
Oncetheoperatorecosystemiskick-started,thefo-
cus moves to fostering network effects.
Here the emphasis is on the creation and sharing
of value across the ecosystem. This is a challenging
taskforoperators,sincetheyarenotaccustomedto
a dynamic where value for users is created and
shared across partners in a value chain rather than
one company, as is the case with more traditional
telecom services.
Ericsson Business Review, Issue 4, 2015
▶
▶
“Partners need
attracting, supporting
and delighting as
much as any
consumer”
Ericsson Business Review, Issue 4, 2015
Figure 1: The three IoT ecosystem levers.
Network
effects
IoT
platform
Market
expectation

3. In fostering network effects, there are two key di-
mensions: business and operational.
The former is related to how value is generat-
ed and split amongst partners. Clearly operators,
together with partners, need to create value for
customers, and in turn generate revenue for the
ecosystem. An operator ecosystem strategy needs
to have a well-defined view of how this revenue
will be shared.
Incentives to develop for the operator’s platform
also need to be well-defined. In addition to a fair
revenue share, these incentives can include ele-
ments such as access to market channels, shared
marketing resources and integration support.
On the operational side, operators need to de-
velop capabilities specific to supporting the rap-
id evolution of an IoT ecosystem. These include
partner management, systems integration and ag-
ile ways of working.
KEY ENABLERS FOR AN OPERATOR’S IOT ECOSYSTEM
Building an IoT ecosystem is a complex under-
taking with many interconnected factors that
need to be balanced. There are, however, a num-
ber of key enablers that operators should focus
on when developing their IoT ecosystems. These
are outlined below.
Enabling platforms
As mentioned above, platforms are the founda-
tion of the ecosystem. Operators need to deploy
IoT platforms that fulfil the expectations of both
customers and partners in terms of functionali-
ty, reliability, security and flexibility. The platform
needs to enable not only vertical solutions, but a
true ecosystem in the form of a marketplace for
IoT products and services.
APIs
APIs are the basic building blocks of an IoT eco-
system, and operators must therefore develop a
strong API strategy. This strategy should be based
on a deep understanding of the IoT markets that
the operator intends to target. Designing apis for
all segments is impractical, which means that a
focused approach is recommended. The opera-
tor should also develop an api roadmap that is in
line with its overall IoT strategy, while the api
pricing and support model must be aligned with
the operator’s ecosystem revenue model.
apis can foster – or discourage – network ef-
fects. If using an operator’s apis is too onerous or
does not create sufficient value, ecosystem part-
ners will be reluctant to invest time or effort. It is
therefore vital that operators design apis with
partner needs in mind.
Proprietary technologies and services
With the IoT, there are a number of roles that op-
erators can play when addressing diverse market
segments. The key one is that of an ecosystem en-
abler. However, in some market segments it makes
sense for operators to offer complete IoT solu-
tions, either with their own products or through
integration with partners.
There are three main reasons for this:
1. To access a market opportunity that is
attractive enough to warrant the venture
2. To signal commitment to the market
3. To kick-start ecosystem development.
A good example is at&t’s Digital Life. In this case,
at&t has developed an integrated home monitor-
ing service together with partners, and markets the
service as an at&t-branded product. The venture
notonlyhasmajormarketpotential–bothinterms
of direct revenues and indirect benefits related to
stickiness and customer loyalty – but also serves
to signal at&t’s commitment to the IoT. In addi-
tion, as the service establishes itself in the market,
at&t is looking at opening it to a wider array of
partners, thus further developing the initial eco-
system [4].
▶
▶
“The way in
which operators
use market
expectation and
network effect
levers will be the
key to differentia-
ting their ecosys-
tems”
ERICSSON
Ericsson Business Review, Issue 4, 2015

4. Communities
For ecosystems to be true ecosystems, communi-
ties of partners need to exist. These partners
should be able to develop products and services
based on the operator’s resources (via apis), as
well as those of other ecosystem participants. In
other words, this is an IoT marketplace enabled
by the operator.
The benefits to operators can be immense. By
enabling others to invest and create new products
and services, the operator is able to provide a rich-
er set of options to its customers. This is achieved
without incurring every cost and risk involved,
but by sharing these with the ecosystem partners.
Think of a smart-home service. If an operator
can create a community around such a service by
making apis available to developers to create
niche products that the operator can then make
available to its customers (either directly or via a
partner application store), the whole ecosystem
benefits. Moreover, the faster the ecosystem de-
velops, the more difficult and onerous it becomes
for others to compete in that market.
Currently, operator IoT communities are almost
non-existent. Such communities need to become
a more prominent element in operators’ IoT strat-
egies in the years to come as ecosystems start to
develop.
Revenue models
Revenue models are a key aspect for the successful
developmentofIoTecosystems.Operatorslooking
toattractecosystempartnersneedtodefinetheright
revenue generation and sharing model – one that
incentivizes partners to join the ecosystem, reduc-
es risks for partners to innovate and fits with the
business model of the individual partners.
Some partners will be attracted to a revenue
sharing model, while others will prefer a licenc-
ing or fixed royalty-based model. This means that
operators will need to support several revenue
and partnership models, which in turn will re-
quire new decision and management systems.
Ecosystem support functions
The final enabler is the internal organization and
the related support functions. A critical function
here is partner management, which not only
means being able to recruit but to incentivize and
support ecosystem partners throughout the part-
nership lifecycle. This is a new capability that goes
beyond basic reseller agreements, and one that
operators will need to develop if they aspire to
create successful IoT ecosystems.
Operators will also require dedicated teams to
support the ecosystem. These teams need exper-
tise all the way from integration, device verifica-
tion and accreditation to overall platform support
and evolution.
In the end, when it comes to developing an IoT
ecosystem, operators need to take the view that
they have customers not only in the form of con-
sumers, but intermediate customers in the form
of partners who need attracting, supporting and
delighting as much as any consumer.
CONCLUSION
In the battle to establish leadership in the IoT, eco-
systems will ultimately be the competitive unit.
There are three main levers for building a suc-
cessful IoT ecosystem – an IoT platform, market
expectation and network effects. Of these, mar-
ket expectation and network effects will be par-
ticularly critical. The way in which operators use
these two levers will be the key to differentiating
their ecosystems successfully.
At the same time, building an IoT ecosystem is
a complex undertaking that requires many inter-
connected factors to be balanced. Enabling plat-
forms, APIs, proprietary technologies and servic-
es, communities, revenue models and ecosystem
support functions are all essential for operators
looking to succeed in this vital area. And if they get
it right, operators are in a prime position to lead a
multi-billion dollar industry that will include a lot
more than just connected coffee machines. ●
284 24-0052 Uen
© Ericsson AB 2015
▶ OMAR VALDEZ-DE-LEON is a
Senior Business Consultant in Ericsson’s
Consulting & Systems Integration
organization, part of Business Unit Global
Services. Over the years he has worked
across IT, telecom and industry in
companies such as Bosch, Logica-CGI,
Elster andVodafone, with a focus on new
business initiatives grounded in emerging
technologies, including machine-to-
machine and the Internet ofThings.
Valdez-De-Leon holds an MSc in
Technology & Innovation Management
from the University of Sussex, UK, and is
in the process of completing an MBA at
Manchester Business School, UK.
ABOUT THE AUTHOR
Ericsson Business Review, Issue 4, 2015
▶REFERENCES
[1]The Guardian,“The internet of food: why your steak might have come from a connected cow”, August 2015, available at:
http://www.theguardian.com/technology/2015/aug/05/internet-of-things-connected-cows-agriculture-food-production
[2] Confused.com, Telematics explained, accessed November 2015, available at:
http://www.confused.com/car-insurance/specialist/black-box/telematics-explained
[3] Gartner,“Gartner’s 2015 Hype Cycle for EmergingTechnologies Identifies the Computing InnovationsThat Organizations Should Monitor”, August 2015,
available at: http://www.gartner.com/newsroom/id/3114217
[4] PRNewswire,“AT&T Digital Life Announces PlansTo Integrate Products And Services From Lutron Electronics, Samsung, Qualcomm And LG Electronics”,
January 2015, available at: http://www.prnewswire.com/news-releases/att-digital-life-announces-plans-to-integrate-products-and-services-from-lutron-
electronics-samsung-qualcomm-and-lg-electronics-300015768.html